Kimco Realty Corp. is pushing to change the covenants on its outstanding bonds so that it can use a different method to value its assets, according to Real Estate Finance & Investment, a CIN sister publication. The move comes on the heels of Vornado Realty Trust amending covenants on three issues so it can take on more debt.Equity Office Properties also said that it is thinking along the same lines.
New Hyde Park, N.Y.-based Kimco wants to change its asset value definition from undepreciated real estate assets to total assets, the industry standard. Total assets are defined as undepreciated real estate assets plus other assets. The process used to evaluate Kimco's core real estate will not change, an official said. He pointed out that Kimco's current model does not consider the book value of all other assets within its business model, including mortgages and credit lines sourced by the company, and other business related to its joint ventures. The REIT is looking for relief across some 20 bond issues.
Some investors said the REIT should sweeten the yield on the bonds if the changes go through. After Vornado secured its agreement, the REIT provided a one-time distribution. Investors are also concerned that more REITs will try to loosen covenants on outstanding bonds. These include keeping total debt to adjusted total assets at less than 60% and limiting total secured debt to adjusted total assets to less than 40%. REITs historically have had better credit fundamentals during down points in the real estate cycle due to the restrictions, analysts said.
Vornado faced resistance from a small group of insurance companies before adopting amendments that allow it to increase its leverage by about 20% of the total value of its assets. Also included is a "step down" covenant where if the rating of the company goes down, the value of the coupon goes up, a feature that alternative and high-yield investors are used to. Kimco is expected to see some resistance from investors, but not as widespread as Vornado.
Since 2002, REITS have slowly been taking advantage of favorable markets by including less stringent covenant packages on their new bond issues beginning in 2002. Until now, the easier terms did not take effect until after previous issues with stricter covenants matured. But REITs have seen a growing demand for their paper from private equity firms, hedge funds, and collateralized debt obligation issuers looking to keep their structures full.
Officials at Citigroup, Bank of America and Deutsche Bank, which served as leads on the deal, did not return calls.